The concept of investing in fine wine is by no means a new one - private collectors have been doing it for decades, if not centuries.  Wine collectors and connoisseurs with the necessary means have been able to finance their passion by buying at least twice as much of a particular fine wine as they intend to drink, and selling half of it once the price has doubled or more.  Institutions, whether corporate or collegial, that require an organised cellar have done the same and often at a substantial profit.  Now more and more professionally managed fine wine funds are emerging, notably in the UK but also elsewhere, part of the growing breed of “alternative” alternatives.  

The investment case is compelling.  Demand used to be centred in Western Europe and the USA.  Nowadays there is increasing demand from China and the Far East, Eastern Europe and South America, as well as growing interest in the traditional markets.  The Chinese in particular are right at the very early stages of a growing appreciation of fine wine.  This is set against fixed and falling supply.  For legal and geographic reasons the vineyards cannot expand, and therefore each vintage is strictly finite in supply.  Furthermore, as a stellar wine matures and is consumed, its reputation grows but its supply contracts.  The statistics bear this out.  According to various academic studies, fine wine has yielded an average gross return of c.15% per annum since 1950.  The Liv-ex Investables Index, which has monthly data going back to early 1988, yields a gross average annual return of 14%. 

In fact, what emerges from an analysis of the Liv-ex data is a picture of consistently high returns and consistently low volatility for fine wine, comparing favourably with other indices. Emerging equity markets have offered good returns over the two decades, but at the price of high volatility.  Gold has offered relatively low volatility at the expense of performance, as have developed market equities in varying degrees.  Fine wine has the highest returns and the lowest volatility, allowing long-term investors to beat emerging market returns while exposing themselves to half the risk.

There is also a marked difference in performance for equities and gold when comparing the recent decade with the one before it.  Gold posted negative average annual returns in the 1990s, while it has been a strong performer over the last decade.  Conversely, major equity markets achieved high returns in the 1990s and have been in negative territory since.  Fine wine has performed consistently throughout.

Risk-adjusted returns for fine wine compare very favourably with other asset classes.  The Sharpe ratio measures average annual return (less a risk free rate) over volatility, represented by annualised standard deviation.  The Sortino ratio measures average returns as above over negative volatility only, which only takes into account months where performance has been negative.

Sources: Liv-ex.com, Bloomberg, MSCI and WAM LLP analysis

* represented by the Liv-ex Investables Index